REG - Enwell Energy PLC - 2024 Interim Results
30/09/2024 07:00
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RNS Number : 1152G Enwell Energy PLC 30 September 2024
30 September 2024
ENWELL ENERGY PLC
2024 INTERIM RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", and together with its
subsidiaries, the "Group"), the AIM-quoted (AIM: ENW) oil and gas exploration
and production group, is pleased to announce its unaudited results for the six
month period ended 30 June 2024.
Highlights
Operational
• Aggregate average daily production of 2,077 boepd (1H 2023: 2,730 boepd) (in
each case calculated on the days when the Group's fields were actually in
production)
• Aggregate production volumes for the period of 377,968 boe (1H 2023: 475,305
boe)
Financial
• Revenue of $23.7 million (1H 2023: $33.1 million), down 28% primarily as a
result of lower production rates and gas prices
• Gross profit of $15.5 million (1H 2023: $19.6 million), down 21%
• Operating profit of $16.9 million (1H 2023: $17.2 million), down 2%
predominantly as a result of lower production rates and gas prices
• Net profit of $12.6 million (1H 2023: $12.5 million), up 1%
• Cash and cash equivalents of $93.7 million as at 30 June 2024 (30 June 2023:
$33.8 million), and of $97.1 million as at 23 September 2024
• Average realised gas, condensate and LPG prices in Ukraine were $306/Mm(3)
(UAH11,919/Mm(3)), $74/bbl and $149/bbl respectively (1H 2023: $419/Mm(3)
(UAH15,315/Mm(3)) gas, $46/bbl condensate and $92/bbl LPG)
Outlook
• The Russian invasion of Ukraine in February 2022 has had and continues to have
a significant impact on all aspects of life in Ukraine, including the Group's
business and operations. The scale and duration of disruption to the Group's
business continues to be difficult to predict, and there remains significant
uncertainty about the outcome of the war in Ukraine
• In June 2024, the suspensions of the VAS production licence and the SC
exploration licence were lifted, and production has now resumed at the VAS
field
• Subject to the Group's ability to operate safely, development work planned for
the remainder of 2024 and 2025 at the MEX-GOL and SV fields includes
completing a workover of the MEX-102 well to access a shallower horizon,
drilling the MEX-114 appraisal well, deepening the MEX-109 well to explore a
deeper horizon, investigating the possible hydraulic fracturing of the SV-29
well, evaluating the potential for sidetracking of the MEX-119 well to access
additional reserves, installing additional compression equipment and upgrading
the flow-line network and other field infrastructure
• At the VAS field, production operations will continue, and at the SC licence
area, planning for the development of this licence area is currently underway
• Currently, the Group retains a substantial proportion of its cash outside
Ukraine, which enhances the Group's ability to navigate the current risk
environment for the foreseeable future, and provides a material buffer to any
further disruptions to the Group's operations
• Development programme for the remainder of 2024 and 2025 is expected to be
funded from the Group's existing cash resources and operational cash flow
Oleksiy Zayets, Interim CEO, commented: "To date, 2024 has been a
solid operational year for Enwell Energy, however our achievements are
significantly overshadowed by the ongoing war, which continues to have a huge
impact on all aspects of life and business in Ukraine. The lifting of the
suspensions of the VAS and SC licences in June 2024 was very welcome news, and
we are pleased to be able to resume operations at those licences. In addition,
we have continued production and some development activities at our MEX-GOL
and SV fields, which is testament to the diligence and fortitude of our
operational team."
This announcement contains inside information for the purposes of Article 7 of
EU Regulation No. 596/2014, which forms part of United Kingdom domestic law by
virtue of the European Union (Withdrawal) Act 2018, as amended by virtue of
the Market Abuse (Amendment) (EU Exit) regulations 2019.
For further information, please contact:
Enwell Energy plc Tel: 020 3427 3550
Chuck Valceschini, Chairman
Oleksiy Zayets, Interim Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409 3494
Rory Murphy / Matthew Chandler
Zeus Capital Limited Tel: 020 7614 5900
Alexandra Campbell-Harris (Corporate Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638 9571
Ellen Wilton / Alex Winch
Dr Gehrig Schultz, BSc Geophysical Engineering, PhD Geophysics, Member of the
European Association of Geophysical Engineers, Member of the Executive
Coordinating Committee of the Continental European Energy Council, and a
Non-Executive Director of the Company, has reviewed and approved the technical
information contained within this announcement in his capacity as a qualified
person, as required under the AIM Rules for Companies.
Definitions/Glossary
bbl barrel
bbl/d barrels per day
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Company Enwell Energy plc
€ Euro
GDP gross domestic product
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
Mm³ thousand cubic metres
MMboe million barrels of oil equivalent
MMscf million scf
MMscf/d million scf per day
% per cent.
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees Celsius and one atmosphere
SV Svyrydivske
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
Chairman's Statement
I am pleased to present the Group's results for the first half of 2024 but
very much wish that the circumstances were different. The invasion of Ukraine
by Russia in February 2022 and the ongoing conflict has created a very
challenging and worrying outlook for both the current and future situation in
Ukraine, and I am greatly saddened by the terrible events occurring there.
The ongoing war has had a significant impact on all aspects of life in
Ukraine, including the Group's business and operations. The overall scale and
duration of future disruption to the Group's business continues to be
difficult to predict, and there remains significant uncertainty about the
outcome of the war.
Notwithstanding the disruption caused by the war, during the first half of
2024, the Group continued with some development activities at the MEX-GOL and
SV fields. However, the suspensions of the VAS production licence and SC
exploration licence in May 2023 meant that no activities on these licences
took place in the period. At the MEX-GOL field, following the completion of
the GOL-107 development well in Q4 2023, the well underwent longer-term
testing to establish its optimal operating parameters. Following testing, the
producing horizon in the well was re-perforated, which improved production
rates, and hydraulic fracturing of the well is being evaluated to assess
whether this may further improve production rates. Additionally, at the
MEX-GOL field, a workover of the MEX-102 well to access a shallower horizon is
underway, and planning has continued for the drilling of the MEX-114 appraisal
well, deepening of the MEX-109 well to explore a deeper horizon and
investigating the possible sidetracking of the MEX-119 well to access
additional reserves. At the SV field, hydraulic fracturing of the SV-29
development well is being considered.
Aggregate average daily production (calculated on the days when the fields
were actually in production) from the MEX-GOL and SV fields during the first
half of 2024 was 2,077 boepd, which is lower than the aggregate daily
production rate of 2,730 boepd achieved on the days of actual production
during the corresponding period in 2023 due to the disruption caused by the
war, natural field decline and the suspension of operations at the VAS field
in May 2023. The aggregate production volumes for the period were 377,968 boe,
which is lower than the aggregate production volumes of 475,305 boe for the
corresponding period in 2023 for the same reasons.
There was also a significant decline in gas prices during the period further
contributing to the decline in revenues to $23.7 million (1H 2023: $33.1
million). The Group's operating profit was lower at $16.9 million (1H 2023:
$17.2 million), but net profit was slightly higher at $12.6 million (1H 2023:
$12.5 million), and cash generated from operations was higher at $21.3 million
(1H 2023: $12.4 million) as a result of the disproportionate reduction in
operating costs.
Whilst the Group's operational activities continued broadly in line with 2023,
development activity was significantly impacted by the increase in risks faced
by the Group in Ukraine.
There is significant disruption to the fiscal and economic environment in
Ukraine due to the ongoing conflict, and while the economy grew during the
first half of 2024, the inflation rate increased and the Ukrainian Hryvnia
weakened further against other currencies. It is likely that fiscal and
economic uncertainties will continue in the future until hostilities cease.
The Ukrainian Government has implemented a number of reforms in the oil and
gas sector in recent years, which include the deregulation of the gas supply
market in late 2015, and subsequently, the simplification of the regulatory
procedures applicable to oil and gas exploration and production activities in
Ukraine.
The deregulation of the gas supply market, supported by electronic gas trading
platforms and improved pricing transparency, has meant that Ukrainian market
prices for gas are broadly correlated with the price of imported gas. During
2024 to date, gas prices weakened, reflecting a similar trend in European gas
prices, as disruption to worldwide oil and gas supplies eased. However,
condensate and LPG prices were higher by comparison to the corresponding
period in 2023.
Restructuring of Smart Holding Group
In January 2023, the Company was notified that there had been a restructuring
of the ownership of the PJSC Smart-Holding Group, a member of which held a
major shareholding in the Company, and which was ultimately controlled by Mr
Vadym Novynskyi ("Mr Novynskyi"). Under this restructuring, which occurred
with effect from 1 December 2022, Mr Novynskyi disposed of his major indirect
shareholding interest in the Company to two trusts registered in Cyprus named
the SMART Trust and the STEP Trust. Further information is contained in the
Company's announcement dated 17 January 2023, and the TR-1 Forms published on
26 January 2023, 31 July 2023 and 20 March 2024.
Regulatory Actions by Ukrainian Authorities affecting the VAS and SC Licences
In early December 2022, the Ukrainian Government imposed sanctions on Mr
Novynskyi, as set out in the Company's announcement dated 9 December 2022.
As announced on 4 January 2023, new legislation, Law No. 2805-IX, relating to
the natural resources sector was enacted in Ukraine, which came into force on
28 March 2023. This legislation is a substantial package of new procedures and
reforms designed to improve the regulatory process relating to the exploration
and development of natural resources in Ukraine. However, the legislation
includes provisions that if the ultimate beneficial owner of a mineral or
hydrocarbon licence becomes the subject of sanctions in Ukraine, then the
State Geologic and Subsoil Survey of Ukraine (the "SGSS") may suspend or
revoke that licence.
Following Law No. 2805-IX coming into force on 28 March 2023, the Ukrainian
authorities have taken a number of regulatory actions against certain of the
Group's subsidiary companies in Ukraine.
As announced on 12 April 2023, such regulatory actions included conducting a
search at the Group's Yakhnyky office, from where the MEX-GOL and SV fields
are operated, and placing certain physical assets of the Ukrainian branch
(representative) office of Regal Petroleum Corporation Limited ("RPC") and LLC
Arkona Gas-Energy ("Arkona") (which respectively hold the MEX-GOL and SV
fields and the SC exploration licence) under seizure, thereby restricting any
actions that would change registration of the property rights relating to such
assets, although the use of such assets was not restricted and therefore the
Company has been able to continue to operate and produce gas and condensate
from the MEX-GOL and SV fields. In addition, the Ministry of Justice of
Ukraine (the "MoJ") made an Order cancelling the registration entry made on
behalf of a subsidiary of the Company named LLC Regal Petroleum Corporation
(Ukraine) Limited in the Unified State Register of Legal Entities,
Individuals-entrepreneurs and Civil Institutions of Ukraine (the "State
Register") relating to the ultimate beneficial owners of such company, which
were stated as being the trustees of the SMART Trust and STEP Trust as
previously notified to the Company, thereby restoring the previous entry in
the State Register, Mr Novynskyi. Furthermore, the SGSS issued an Order to RPC
requiring that additional information be provided and/or violations be
eliminated in the disclosures relating to the ultimate beneficial owners of
the MEX-GOL and SV licences respectively.
On 2 May 2023, the MoJ made further Orders cancelling the registration entry
made on behalf of three further Ukrainian subsidiaries of the Company named
LLC Prom-Enerho Produkt ("PEP"), Arkona and LLC Well Investum ("Well
Investum") respectively in the State Register relating to the ultimate
beneficial owners of such companies, which again were stated as being the
trustees of the SMART Trust and STEP Trust, thereby restoring the
previous entry, Mr Novynskyi. PEP holds the VAS production licence, Arkona
holds the SC exploration licence and Well Investum is a dormant company.
Following the issuance of the abovementioned Orders by the MoJ, Mr Novynskyi
is registered in the State Register as the ultimate beneficial owner of each
of PEP and Arkona, and is consequently recognised by the SGSS as the ultimate
beneficial owner of each of the VAS production licence and SC exploration
licence. As a result, on 4 May 2023, the SGSS issued orders suspending the VAS
production licence and SC exploration licence for a period of 5 years
effective from that date. Accordingly, the Company ceased all field and
production operations on the VAS and SC licence areas at that time.
However, on 26 June 2024, the SGSS issued orders to renew the validity of each
of the VAS production licence and SC exploration licence, thereby cancelling
the suspensions of those licences, and enabling the resumption of operational
activities at those licences. Further information is contained in the
Company's announcement dated 27 June 2024.
In September 2024, new legislation has come into force which requires that
branches (or representative offices) of foreign companies operating in Ukraine
register their ultimate beneficial owners in Ukrainian Registries. RPC, which
holds the MEX-GOL and SV licences, operates such a branch and is therefore
required to register its ultimate beneficial owners in such Registries, which
raises a potential risk that such registration will not be accepted by the
Ukrainian authorities, and possibly result in regulatory action against RPC
and/or its licences and assets, including suspension of the MEX-GOL and SV
licences.
Board and Management Changes
In March 2024, Chris Hopkinson stepped down as Non-Executive Chairman of the
Board, and Sergii Glazunov stepped down as Chief Executive Officer and a
Director, and I joined the Board as Non-Executive Chairman alongside Igor
Basai as a Non-Executive Director. In addition, Oleksiy Zayets was appointed
as Interim Chief Executive Officer.
Outlook
The ongoing war in Ukraine creates a devastating humanitarian situation, as
well as extreme challenges to the country's fiscal, economic and business
environment. In such, circumstances, it is extremely difficult to plan future
investment and operational activities at the Group's fields. However, subject
to it being safe to do so, the Group is planning to undertake further limited
development activities during the remainder of 2024 and beyond in order to
continue the development of its fields. In doing so, the Group is taking and
will continue to take all measures available to protect and safeguard its
personnel and business, with the safety and wellbeing of its personnel and
contractors being paramount. The Group retains a significant proportion of its
cash reserves outside Ukraine, and this provides a material buffer to any
further disruptions to the Group's operations. This has enabled the Board to
reach the opinion that the Group has sufficient resources to navigate the
current risk environment for the foreseeable future.
In conclusion, on behalf of the Board, I would like to thank all of our staff
for the continued dedication and support during 2024 to date, especially their
remarkable fortitude during the ongoing conflict in Ukraine.
Chuck Valceschini
Chairman
Chief Executive's Statement
Introduction
The war in Ukraine has materially disrupted the Group's development activity
at its Ukrainian fields during the first half of 2024. At the MEX-GOL and SV
fields, production operations and some development activities continued, with
the GOL-107 development well being completed in Q4 2023 and undergoing
longer-term testing to establish its optimal operating parameters. Following
testing, the producing horizon in the well was re-perforated, which improved
production rates, and hydraulic fracturing of the well is being evaluated to
assess whether this may further improve flow rates.
At the VAS field, production operations remained suspended following the
suspension of the VAS production licence in May 2023, but, in June 2024, this
suspension was lifted, and production operations have now resumed. In
addition, planning for the further development of the field, as well as for a
proposed new well to explore the VED prospect within the VAS licence area have
also resumed.
The SC exploration licence was also suspended in May 2023, but similarly, the
suspension of the SC exploration licence was lifted in June 2024, and planning
has resumed for the development of the licence area.
Overall production in the first half of 2024 was lower than in the
corresponding period in 2023 due to the disruption to production operations
caused by the war in Ukraine, natural field decline and the suspension of the
VAS production licence.
Production
The average daily production of gas, condensate and LPG from the MEX-GOL and
SV fields during the six month period ended 30 June 2024 is shown below. There
was no production from the VAS field due to the suspension of the VAS
production licence.
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2024 1H 2023 1H 2024 1H 2023 1H 2024 1H 2023 1H 2024 1H 2023
8.6 9.8 323 384 325 413 2,077 2,400
MEX-GOL & SV
- 1.7 - 17 - - - 330
VAS
8.6 11.5 323 401 325 413 2,077 2,730
Total
As a result of the continued operational disruptions caused by the war and
deferment of development work, the Group's average daily production rate for
the first half of 2024 has been materially adversely affected. In addition, as
a result of the regulatory actions by the Ukrainian authorities, the VAS
production licence and the SC exploration licence were suspended between 4 May
2023 and 26 June 2024.
Aggregate production volumes for 1H 2024 were 377,968 boe, which is lower than
the aggregate production volumes of 475,305 boe in the corresponding period in
2023 for the reasons set out above.
Production is currently continuing at the MEX-GOL and SV fields at a rate of
approximately 1,900 boepd, and following the lifting of the licence suspension
at the VAS field, production operations resumed, and, after a period of
cleaning up, the production rate is recovering back towards the production
rate prior to the suspension of the licence.
Operations
The war in Ukraine has significantly affected fiscal and economic stability in
the country, and the oil and gas sector in Ukraine has been particularly
affected by interruptions to power supplies, the unavailability of oil field
equipment and services and disruptions to the markets for the sale of gas,
condensate and LPG. In addition, the decrease in gas prices in Europe fed
through to the Group's realised prices in Ukraine, impacting the Group's
revenues and operating profitability during the period.
During the first half of 2024, the Group continued to refine its geological
subsurface models of the MEX-GOL, SV and VAS fields, as well as the SC licence
area, in order to enhance its strategy for the further development of such
fields and licence area, including the timing and level of future capital
investment required to exploit the hydrocarbon resources.
At the MEX-GOL field, the GOL-107 development well, targeting production from
the V-20 and V-23 Visean formations, was completed in late October 2023, with
the well having been drilled to a final depth of 5,190 metres. One interval,
at a drilled depth of 5,140 - 5,143 metres, within the V-23 formation, was
perforated and demonstrated gas flows, but at lower than anticipated rates.
The well was hooked up to the gas processing facilities to undergo longer-term
testing to establish its optimal operating parameters. Following this testing,
the producing horizon in the well was re-perforated, which improved production
rates, and hydraulic fracturing of the well is being evaluated to assess
whether this may further improve flow rates.
The Group continued to operate each of the SV-2 and SV-12 wells under joint
venture agreements with PJSC Ukrnafta, the majority State-owned oil and gas
producer. Under the agreements, the gas and condensate produced from the
respective wells is sold under an equal net profit sharing arrangement between
the Group and PJSC Ukrnafta, with the Group accounting for the hydrocarbons
produced and sold from the wells as revenue, and the net profit share due to
PJSC Ukrnafta being treated as a lease expense in cost of sales. However,
following the SV-2 well experiencing water ingress, a workover of this well
was undertaken to replace the production string and remove obstructions in the
well, but this work was unsuccessful and further remedial work is not being
considered at the present time.
At the VAS field, there were no operational activities during the period due
to the continued suspension of the VAS production licence since May 2023, but
with the lifting of the suspension of such licence on 26 June 2024,
operational activities resumed, including production operations, and, after a
period of cleaning up, the production rate is recovering back towards the
production rate prior to the suspension of the licence. Planning for the
further development of the field, as well as for a proposed new well to
explore the VED prospect within the VAS licence area, has also resumed.
Similarly, at the SC exploration licence area, there were no operational
activities due to the continued suspension of the SC exploration licence since
May 2023, but such suspension was lifted on 26 June 2024, and since then,
planning for the further development of the licence area has resumed.
Outlook
The ongoing war in Ukraine has caused significant disruption to the country as
a whole and to the Group's business activities, and until there is a
satisfactory resolution to the conflict, the disruption and uncertainty are
likely to continue. However, subject to it being safe to do so, during the
remainder of 2024 and 2025, the Group plans to continue the development of its
fields to the extent it is possible to do so.
At the MEX-GOL and SV fields, the development programme includes completing a
workover of the MEX-102 well to access a shallower horizon, drilling the
MEX-114 appraisal well, deepening of the MEX-109 well to explore a deeper
horizon in the Visean formation, investigating the possible hydraulic
fracturing of the SV-29 well, evaluating the potential for sidetracking of the
MEX-119 well to access additional reserves, installing additional compression
equipment and upgrading and maintaining the flow-line network and pipelines
and other field infrastructure, as well as planning for the further
development of the fields.
At the VAS field, production operations will continue, together with planning
for the further development of the field, as well as for a proposed new well
to explore the VED prospect within the VAS licence area.
At the SC exploration licence area, planning for the development of the
licence area will continue, including planning for the installation of new gas
processing facilities and other surface infrastructure and/or the feasibility
of connection to existing gas processing facilities.
Finally, I would like to add my thanks to all of our staff for their continued
hard work and dedication over the course of 2024, and to especially recognise
their ongoing efforts and professionalism in the face of the extremely
challenging current situation in Ukraine.
Oleksiy Zayets
Interim Chief Executive Officer
Finance Review
Despite the continued significant disruption caused by the war in Ukraine, the
Group was still able to generate a net profit for the period of $12.6 million,
marginally higher than the first half of 2023 (1H 2023: $12.5 million),
notwithstanding lower production rates and lower gas prices.
Revenue for the period, derived from the sale of the Group's Ukrainian gas,
condensate and LPG production, was 28% lower at $23.7 million (1H 2023: $33.1
million), primarily as a result of the combined effects of lower production
rates and a decrease in gas prices in the period, slightly mitigated by an
improvement in condensate and LPG prices.
Aggregate daily production for the first half of 2024 was down approximately
24% at 2,077 boepd (1H 2023: 2,730 boepd), in each case calculated on the days
when the Group's fields were actually in production, due to the disruption to
operations and ongoing reduced levels of field development as a result of the
war in Ukraine, natural field decline and the suspension of the VAS production
licence in May 2023. Aggregate production volumes for the period were 377,968
boe, which is lower than the aggregate production volumes of 475,305 boe in
the corresponding period in 2023 for the same reasons.
During 2024, global, and particularly European, gas prices declined as the
disruption to supplies caused by the Russian invasion of Ukraine abated, and
this decrease also occurred in Ukraine, causing a 27% decline in average gas
price realisations in the period at $306/Mm(3) (UAH11,919/Mm(3)). However,
condensate and LPG average sales prices improved by 61% and 62% at $74/bbl and
$149/bbl respectively (1H 2023: $419/Mm(3) (UAH15,315/Mm(3)), $46/bbl and
$92/bbl respectively).
During the period from 1 July 2024 to 31 August 2024, the average realised
gas, condensate and LPG prices were $308/Mm(3) (UAH12,639/Mm(3)), $114/bbl and
$106/bbl respectively.
Gross profit for the period was 21% lower at $15.5 million (1H 2023: $19.6
million), the dampened effect of the steeper fall in revenues being offset to
an extent by a 40% fall in cost of sales for the period at $8.2 million (1H
2023: $13.6 million). The decline in production resulted in a decline in
depreciation, and the decreased gas prices also disproportionately reduced the
revenue-related costs of taxes and well rental, down a combined 57% at $3.1
million (1H 2023: $7.2 million).
The subsoil tax rates applicable to gas production were stable during the
first six months of 2024 and were as follows:
(i) when gas prices are up to $150/Mm3, the rate for wells drilled prior to 1
January 2018 ("old wells") is 14.5% for gas produced from deposits at depths
shallower than 5,000 metres and 7% for gas produced from deposits deeper than
5,000 metres, and for wells drilled after 1 January 2018 ("new wells") is 6%
for gas produced from deposits at depths shallower than 5,000 metres and 3%
for gas produced from deposits deeper than 5,000 metres;
(ii) when gas prices are between $150/Mm3 and $400/Mm3, the rate for old wells is
29% for gas produced from deposits at depths shallower than 5,000 metres and
14% for gas produced from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower than 5,000 metres
and 6% for gas produced from deposits deeper than 5,000 metres;
(iii) when gas prices are more than $400/Mm3, for the first $400/Mm3, the rate for
old wells is 29% for gas produced from deposits at depths shallower than 5,000
metres and 14% for gas produced from deposits deeper than 5,000 metres, and
for new wells is 12% for gas produced from deposits at depths shallower than
5,000 metres and 6% for gas produced from deposits deeper than 5,000 metres,
and for the difference between $400/Mm3 and the actual price, the rate for old
wells is 65% for gas produced from deposits at depths shallower than 5,000
metres and 31% for gas produced from deposits deeper than 5,000 metres, and
for new wells is 36% for gas produced from deposits at depths shallower than
5,000 metres and 18% for gas produced from deposits deeper than 5,000 metres.
The tax rates applicable to condensate production were 31% for condensate
produced from deposits shallower than 5,000 metres and 16% for condensate
produced from deposits deeper than 5,000 metres, for both old and new wells.
As a direct result of the war in Ukraine, including the significant decline in
domestic consumption disrupting the previous supply, demand and pricing
dynamics, there has been a divergence between domestic and European gas
pricing, and accordingly, the methodology (linked to European prices) used to
determine the reference gas price for the subsoil tax rates has had a
significantly detrimental effect for domestic gas producers. In order to
address this issue, legislation was implemented in August 2022 which modified
such methodology to ensure that it operates as originally intended (with such
reference price being aligned with domestic prices).
Administrative expenses for the period were lower at $2.4 million (1H 2023:
$3.7 million) as a result of the reduced level of activity.
The tax charge for the six months ended 30 June 2024 was lower at $4.2 million
(1H 2023: $5.0 million), and comprised a current tax charge of $3.1 million
(1H 2023: $3.1 million) and a deferred tax charge of $1.1 million (1H 2023:
$1.9 million).
A deferred tax asset relating to the Group's provision for decommissioning as
at 30 June 2024 of $0.6 million (31 December 2023: $0.6 million) was
recognised on the tax effect of the temporary differences of the Group's
provision for decommissioning at the MEX-GOL and SV fields, and its tax base.
A deferred tax liability relating to the Group's development and production
assets at the MEX-GOL and SV fields as at 30 June 2024 of $7.0 million (31
December 2023: $5.5 million) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development and
production asset at the MEX-GOL and SV fields, and its tax base.
A deferred tax asset relating to the Group's provision for decommissioning as
at 30 June 2024 of $0.3 million (31 December 2023: $0.3 million) was
recognised on the tax effect of the temporary differences on the Group's
provision on decommissioning at the VAS field, and its tax base. A deferred
tax asset relating to the Group's development and production assets at the VAS
field as at 30 June 2024 of $0.7 million (31 December 2023: deferred tax
liability of $0.1) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development and
production asset at the VAS field, and its tax base.
Capital investment of just $0.5 million reflects the greatly reduced
investment in the Group's oil and gas development and production assets during
the period (1H 2023: $3.0 million). The low level of capital investment in the
period is a function of the deferral of certain aspects of the Group's
development plans necessitated by the ongoing war in Ukraine and the
suspension of the Group's VAS and SC licences, but has been increased since
the end of the period after the lifting of the suspensions of the Group's VAS
and SC licences in late June 2024.
A review of any indicators of impairment of the carrying value of the Group's
assets was undertaken at the period end and this review concluded that the war
in Ukraine and the suspension of the VAS production licence had resulted in
such an indicator. Impairment reviews were therefore conducted on the carrying
value of the Group's assets but did not result in the recognition of any
impairment loss.
Cash and cash equivalents held as at 30 June 2024 were significantly higher at
$93.7 million (1H 2023: $33.8 million), primarily due to the payment of the
£48.1 million interim dividend in June 2023. The Group's cash and cash
equivalents balance as at 23 September 2024 was $97.1 million, held as to
$79.9 million equivalent in Ukrainian Hryvnia and the balance of $17.2 million
equivalent predominantly in US Dollars, Euros and Pounds Sterling.
During the first six months of 2024, the Ukrainian Hryvnia weakened slightly
against the US Dollar, at UAH38.0/$1.00 on 31 December 2023 and UAH40.5/$1.00
on 30 June 2024. The impact of this was $8.9 million of foreign exchange loss
(1H 2023: $0.7 million of foreign exchange gain). Increases and decreases in
the value of the Ukrainian Hryvnia against the US Dollar affect the carrying
value of the Group's assets. The official exchange rate of the Ukrainian
Hryvnia to the US Dollar on 23 September 2024 was UAH41.4/$1.00.
Cash from operations has funded the capital investment during the first six
months of 2024, and the Group's current cash position and positive operating
cash flow are the sources from which the Group plans to fund the development
programmes for its assets over the remainder of 2024 and beyond. This is
coupled with the fact that the Group is currently debt-free, and therefore has
no debt covenants that may otherwise impede its ability to implement
contingency plans if domestic and/or global circumstances dictate. This
flexibility and ability to monitor and manage development plans and liquidity
is a cornerstone of our planning, and underpins our assessments of the future.
With monetary resources at the end of the period of $93.7 million equivalent,
and annual running costs of less than $8 million, the Group remains in a very
strong position, notwithstanding the impact of the current conflict in
Ukraine, as well as any local or global shocks that may occur to the industry
and/or the Group.
Bruce Burrows
Finance Director
Principal Risks and How We Manage Them
The Group has a risk evaluation methodology in place to assist in the review
of the risks across all material aspects of its business. This methodology
highlights external, operational and technical, financial and corporate risks
and assesses the level of risk and potential consequences. It is periodically
presented to the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating actions. Key
risks recognised and mitigation factors are detailed below:-
Risk Mitigation
External risks
War in Ukraine
On 24 February 2022, Russia invaded Ukraine and there is currently a serious The Group has assets in the areas of conflict in the east of Ukraine, and the
and ongoing war within Ukraine. This war is having a huge impact on Ukraine war has disrupted its operations in those areas. The Group has been
and its population, with significant destruction of infrastructure and undertaking only limited field and production operations at the MEX-GOL and SV
buildings in the areas of conflict, as well as damage in other areas of fields, with no operational activities at the VAS field and SC licence area
Ukraine. The war is resulting in significant casualties and has caused a huge during the period of their suspension between May 2023 and June 2024. At the
humanitarian catastrophe and refugee influx into neighbouring countries. The fields, inventories of hydrocarbons are being maintained at minimum levels.
war is also impacting the fiscal and economic environment in Ukraine, as well Where possible, staff work remotely and have been supplied with all necessary
as the financial stability and banking system in Ukraine, including devices and software to facilitate remote working. Additionally, the Group
restrictions on the transfer of funds outside Ukraine. The war is an aims to maintain a significant proportion of its cash resources outside
escalation of the previous regional conflict risk faced by the business, a Ukraine. The Group continues to monitor the situation and endeavours to
dispute that has been going on since 2014 in parts of eastern Ukraine, and protect its assets and safeguard its staff and contractors.
since that time Russia has continued to occupy Crimea. The current war is also
having a significant adverse effect on the Ukrainian financial markets,
hampering the ability of Ukrainian companies and banks to obtain funding from
the international capital and debt markets. The war has disrupted the Group's
business and operations, causing periods of suspension of field operations,
and has also impacted the supply of materials and equipment and the
availability of contractors to undertake field operations. At present, the war
is ongoing and the scope and duration of the war is uncertain.
Risk relating to Ukraine
Ukraine is an emerging market and as such the Group is exposed to greater The Group minimises this risk by continuously monitoring the market in Ukraine
regulatory, economic and political risks than it would be in other and by maintaining as strong a working relationship as possible with the
jurisdictions. Emerging economies are generally subject to a volatile Ukrainian regulatory authorities. The Group also maintains a significant
political and economic environment, which makes them vulnerable to market proportion of its cash holdings in international banks outside Ukraine.
downturns elsewhere in the world and could adversely impact the Group's
ability to operate in the market. Furthermore, the war in Ukraine is impacting
the fiscal and economic environment, the financial and banking system, and the
economic stability of Ukraine. As a result, Ukraine will require financial
assistance and/or aid from international financial agencies to provide
economic support and assist with the reconstruction of infrastructure and
buildings damaged in the war.
Banking system in Ukraine
The banking system in Ukraine has been under great strain in recent years due The creditworthiness and potential risks relating to the banks in Ukraine are
to the weak level of capital, low asset quality caused by the economic regularly reviewed by the Group, but the geopolitical and economic events in
situation, currency depreciation, changing regulations and other economic Ukraine over recent years have significantly weakened the Ukrainian banking
pressures generally, and so the risks associated with the banks in Ukraine sector. This has been exacerbated by the current war in Ukraine. In light of
have been significant, including in relation to the banks with which the Group this, the Group has taken and continues to take steps to diversify its banking
has operated bank accounts. This situation was improving moderately following arrangements between a number of banks in Ukraine. These measures are designed
remedial action by the National Bank of Ukraine, but the current war has to spread the risks associated with each bank's creditworthiness, and the
significantly affected such improvements, and the National Bank of Ukraine has Group endeavours to use banks that have the best available creditworthiness.
imposed a number of restrictive measures designed to protect the banking Nevertheless, and despite the recent improvements, the Ukrainian banking
system, including restrictions on the transfer of funds outside Ukraine sector remains weakly capitalised and so the risks associated with the banks
(albeit that the Group aims to maintain a significant proportion of its cash in Ukraine remain significant, including in relation to the banks with which
resources outside Ukraine. In addition, Ukraine continues to be supported by the Group operates bank accounts. As a consequence, the Group also maintains a
funding from the International Monetary Fund, and has requested further significant proportion of its cash holdings in international banks outside
funding support from the International Monetary Fund. Ukraine.
Geopolitical environment in Ukraine
Although there were some improvements in recent years, there has not been a The Group continually monitors the market and business environment in Ukraine
final resolution of the political, fiscal and economic situation in Ukraine, and endeavours to recognise approaching risks and factors that may affect its
and the current war has had a severe detrimental effect on the economic business. However, the war in Ukraine creates material challenges in planning
situation in Ukraine. The ongoing effects of this are difficult to predict and future investment and operations. The Group is limiting its operational
likely to continue to affect the Ukrainian economy and potentially the Group's activities to minimise risk to its staff and contractors, and to limit its
business. This situation is currently affecting the Group's production and financial exposure.
field operations, and the ongoing instability is disrupting the Group's
development and operational planning for its assets.
Climate change
Any near and medium-term continued warming of the planet can have potentially The Group's plans include: assessing, reducing and/or mitigating its emissions
increasing negative social, economic and environmental consequences, in its operations; and identifying climate change-related risks and assessing
generally, globally and regionally, and specifically in relation to the Group. the degree to which they can affect its business, including financial
The potential impacts include: loss of market; and increased costs of implications. The HSE Committee is specifically tasked with overseeing,
operations through increasing regulatory oversight and controls, including measuring, benchmarking and mitigating the Group's environmental and climate
potential effective or actual loss of licences to operate. As a diligent impact, which will be reported on in future periods. At this stage, the Group
operator aware of and responsive to its good stewardship responsibilities, the does not consider climate change to have any material implications for the
Group not only needs to monitor and modify its business plans and operations Group's financial statements, including accounting estimates.
to react to changes, but also to ensure its environmental footprint is as
minimal as it can practicably be in managing the hydrocarbon resources the
Group produces.
Operational and technical risks
Quality, Health, Safety and Environment ("QHSE")
The oil and gas industry, by its nature, conducts activities which can cause The Group maintains QHSE policies and requires that management, staff and
health, safety, environmental and security incidents. Serious incidents can contractors adhere to these policies. The policies ensure that the Group meets
not only have a financial impact but can also damage the Group's reputation Ukrainian legislative standards in full and achieves international standards
and the opportunity to undertake further projects. The war in Ukraine poses to the maximum extent possible. As a consequence of the current war in
significant risks to field operations, by way of potential threat to the lives Ukraine, operations at the MEX-GOL, SV and VAS fields and SC licence area have
of employees and contractors, and damage to equipment and infrastructure. been suspended for periods, and currently only limited field operations are
continuing at the fields. Only essential staff are located at site, and all
other staff are working remotely, either from areas away from the conflict
areas or outside Ukraine. The Group has invested in technology that allows
many staff to work just as effectively from remote locations.
Industry risks
The Group is exposed to risks which are generally associated with the oil and The Group has well qualified and experienced technical management staff to
gas industry. For example, the Group's ability to pursue and develop its plan and supervise operational activities. In addition, the Group engages with
projects and undertake development programmes depends on a number of suitably qualified local and international geological, geophysical and
uncertainties, including the availability of capital, seasonal conditions, engineering experts and contractors to supplement and broaden the pool of
regulatory approvals, gas, oil, condensate and LPG prices, development costs expertise available to the Group. Detailed planning of development activities
and drilling success. As a result of these uncertainties, it is unknown is undertaken with the aim of managing the inherent risks associated with oil
whether potential drilling locations identified on proposed projects will ever and gas exploration and production, as well as ensuring that appropriate
be drilled or whether these or any other potential drilling locations will be equipment and personnel are available for the operations, and that local
able to produce gas, oil or condensate. In addition, drilling activities are contractors are appropriately supervised.
subject to many risks, including the risk that commercially productive
reservoirs will not be discovered. Drilling for hydrocarbons can be
unprofitable, not only due to dry holes, but also as a result of productive
wells that do not produce sufficiently to be economic. In addition, drilling
and production operations are highly technical and complex activities and may
be curtailed, delayed or cancelled as a result of a variety of factors.
Production of hydrocarbons
Producing gas and condensate reservoirs are generally characterised by In recent years, the Group has engaged external technical consultants to
declining production rates which vary depending upon reservoir characteristics undertake a comprehensive review and re-evaluation study of the MEX-GOL and SV
and other factors. Future production of the Group's gas and condensate fields in order to gain an improved understanding of the geological aspects of
reserves, and therefore the Group's cash flow and income, are highly dependent the fields and reservoir engineering, drilling and completion techniques, and
on the Group's success in operating existing producing wells, drilling new the results of this study and further planned technical work are being used by
production wells and efficiently developing and exploiting any reserves, and the Group in the future development of these fields. The Group has established
finding or acquiring additional reserves. The Group may not be able to an ongoing relationship with such external technical consultants to ensure
develop, find or acquire reserves at acceptable costs. The experience gained that technical management and planning is of a high quality in respect of all
from drilling undertaken to date highlights such risks as the Group targets development activities on the Group's fields
the appraisal and production of these hydrocarbons.
Risks relating to the further development and operation of the Group's gas and
condensate fields in Ukraine
The planned development and operation of the Group's gas and condensate fields The Group's technical management staff, in consultation with its external
in Ukraine is susceptible to appraisal, development and operational risk. This technical consultants, carefully plan and supervise development and
could include, but is not restricted to, delays in the delivery of equipment operational activities with the aim of managing the risks associated with the
in Ukraine, failure of key equipment, lower than expected production from further development of the Group's fields in Ukraine. This includes detailed
wells that are currently producing, or new wells that are brought on-stream, review and consideration of available subsurface data, utilisation of modern
problematic wells and complex geology which is difficult to drill or geological software, and utilisation of engineering and completion techniques
interpret. The generation of significant operational cash is dependent on the developed for the fields. With regards to operational activities, the Group
successful delivery and completion of the development and operation of the ensures that appropriate equipment and personnel are available for the
fields. The war in Ukraine is impacting planning and implementation of operations, and that operational contractors are appropriately supervised. In
development and operations at the Group's fields. addition, the Group performs a review of indicators of impairment of its oil
and gas assets on an annual basis, and considers whether an assessment of its
oil and gas assets by a suitably qualified independent assessor is appropriate
or required.
Drilling and workover operations
Due to the depth and nature of the reservoirs in the Group's fields, the The utilisation of detailed sub-surface analysis, careful well planning and
technical difficulty of drilling or re-entering wells in the Group's fields is engineering design in designing work programmes, along with appropriate
high, and this and the equipment limitations within Ukraine, can result in procurement procedures and competent on-site management, aims to minimise
unsuccessful or lower than expected outcomes for wells. these risks.
Maintenance of facilities
There is a risk that production or transportation facilities can fail due to The Group's facilities are operated and maintained at standards above the
non-adequate maintenance, control or poor performance of the Group's Ukrainian minimum legal requirements. Operations staff are experienced and
suppliers. receive supplemental training to ensure that facilities are properly operated
and maintained. Service providers are rigorously reviewed at the tender stage
and are monitored during the contract period.
Financial risks
Exposure to cash flow and liquidity risk
There is a risk that insufficient funds are available to meet the Group's The Group maintains adequate cash reserves and closely monitors forecasted and
development obligations to commercialise the Group's oil and gas assets. Since actual cash flow, as well as short and longer-term funding requirements. The
a significant proportion of the future capital requirements of the Group is Group aims to maintain a significant proportion of its cash resources outside
expected to be derived from operational cash generated from production, Ukraine. The Group does not currently have any loans outstanding, internal
including from wells yet to be drilled, there is a risk that in the longer financial projections are regularly made based on the latest estimates
term insufficient operational cash is generated, or that additional funding, available, and various scenarios are run to assess the robustness of the
should the need arise, cannot be secured. The war in Ukraine has disrupted Group's liquidity. However, as the risk to future capital funding is inherent
production operations at the Group's fields, and consequently reduced in the oil and gas exploration and development industry and reliant in part on
anticipated cash flows from those fields, and this has increased the risk future development success, it is difficult for the Group to take any other
regarding sufficiency of capital for development. In addition, the conflict measures to further mitigate this risk, other than tailoring its development
may disrupt the sales market for hydrocarbons that are produced. Currently, activities to its available capital funding from time to time. The Group aims
however, hydrocarbon prices are reasonably strong, which is ameliorating the to maintain as diverse a range of banking relationships as possible to reduce
potential reduction in cash flows, and the Group's sales counterparties are the risks associated with limited accessibility to banking services which may
meeting their financial obligations. In addition to the risk of operational exist from time to time.
cash shortfalls, there is a risk that even with strong cash flows and cash
balances, the Group, from time to time, can suffer from non-Ukrainian
operational banking appetite for businesses such as the Group's business,
which can ultimately manifest itself in having restricted access to banking
services.
Ensuring appropriate business practices
The Group operates in Ukraine, an emerging market, where certain inappropriate The Group maintains anti-bribery and corruption policies in relation to all
business practices may, from time to time occur, such as corrupt business aspects of its business, and ensures that clear authority levels and robust
practices, bribery, appropriation of property and fraud, all of which can lead approval processes are in place, with stringent controls over cash management
to financial loss. and the tendering and procurement processes. In addition, office and site
protection is maintained to protect the Group's assets.
Hydrocarbon price risk
The Group derives its revenue principally from the sale of its Ukrainian gas, The Group sells a proportion of Its hydrocarbon production through offtake
condensate and LPG production. These revenues are subject to commodity price arrangements, which include pricing formulae so as to ensure that it achieves
volatility and political influence. A prolonged period of low gas, condensate market prices for its products, as well utilising the electronic market
and LPG prices may impact the Group's ability to maintain its long-term platforms in Ukraine to achieve market prices for its remaining products.
investment programme with a consequent effect on its growth rate, which in However, hydrocarbon prices in Ukraine are implicitly linked to world
turn may impact the Company's share price or any shareholder returns. Lower hydrocarbon prices and so the Group is subject to external price trends.
gas, condensate and LPG prices may not only decrease the Group's revenues per
unit, but may also reduce the amount of gas, condensate and LPG which the
Group can produce economically, as would increases in costs associated with
hydrocarbon production, such as subsoil taxes and royalties. The overall
economics of the Group's key assets (being the net present value of the future
cash flows from its Ukrainian projects) are far more sensitive to long term
gas, condensate and LPG prices than short-term price volatility. However,
short-term volatility does affect liquidity risk, as, in the early stage of
the projects, income from production revenues is offset by capital investment.
In addition, the war in Ukraine may disrupt the sales market for hydrocarbons,
although, currently, hydrocarbon prices are reasonably strong, and the Group's
sales counterparties are meeting their financial obligations.
Currency risk
Since the beginning of 2014, the Ukrainian Hryvnia significantly devalued The Group's sales proceeds are received in Ukrainian Hryvnia, and the majority
against major world currencies, including the US Dollar, where it has fallen of the capital expenditure costs for the current investment programme will be
from UAH8.3/$1.00 on 1 January 2014 to UAH38.0/$1.00 on 31 December 2023, and incurred in Ukrainian Hryvnia, thus the currency of revenue and costs are
UAH41.4/$1.00 on 23 September 2024. This devaluation has been a significant largely matched. In light of the previous devaluation and volatility of the
contributor to the imposition of banking restrictions by the National Bank of Ukrainian Hryvnia against major world currencies, and since the Ukrainian
Ukraine over recent years. In addition, the geopolitical events in Ukraine Hryvnia does not benefit from the range of currency hedging instruments which
over recent years and the current war in Ukraine are likely to continue to are available in more developed economies, the Group has adopted a policy
impact the valuation of the Ukrainian Hryvnia against major world currencies. that, where possible, funds not required for use in Ukraine be retained on
Further devaluation of the Ukrainian Hryvnia against the US Dollar will affect deposit in the United Kingdom and Europe, principally in US Dollars.
the carrying value of the Group's assets.
Counterparty and credit risk
The challenging political and economic environment in Ukraine and current war The Group monitors the financial position and credit quality of its
means that businesses can be subject to significant financial strain, which contractual counterparties and seeks to manage the risk associated with
can mean that the Group is exposed to increased counterparty risk if counterparties by contracting with creditworthy contractors and customers.
counterparties fail or default in their contractual obligations to the Group, Hydrocarbon production is sold on terms that limit supply credit and/or title
including in relation to the sale of its hydrocarbon production, resulting in transfer until payment is received.
financial loss to the Group.
Financial markets and economic outlook
The performance of the Group is influenced by global economic conditions and, The Group's sales proceeds are received in Ukrainian Hryvnia and a significant
in particular, the conditions prevailing in the United Kingdom and Ukraine. proportion of investment expenditure is made in Ukrainian Hryvnia, which
The economies in these regions have been subject to volatile pressures in minimises risks related to foreign exchange volatility. However, hydrocarbon
recent periods, with the global economy having experienced a long period of prices in Ukraine are implicitly linked to world hydrocarbon prices and so the
difficulty, the COVID pandemic, and more particularly the current war in Group is subject to external price movements. The Group holds a significant
Ukraine. This has led to extreme foreign exchange movements in the Ukrainian proportion of its cash reserves in the United Kingdom and Europe, mostly in US
Hryvnia, high inflation and interest rates, and increased credit risk relating Dollars, with reputable financial institutions. The financial status of
to the Group's key counterparties. counterparties is carefully monitored to manage counterparty risks.
Nevertheless, the overall exposure that the Group faces as a result of these
risks cannot be predicted and many of these are outside of the Group's
control.
Corporate risks
Ukrainian production licences
The Group operates in a region where the right to production can be challenged The Group ensures compliance with commitments and regulations relating to its
by State and non-State parties. During 2010, this manifested itself in the production and exploration licences through Group procedures and controls or,
form of a Ministry Order instructing the Group to suspend all operations and where this is not immediately feasible for practical or logistical
production from its MEX-GOL and SV production licences, which was not resolved considerations, seeks to enter into dialogue with the relevant Government
until mid-2011. In 2013, new rules relating to the updating of production bodies with a view to agreeing a reasonable time frame for achieving
licences led to further challenges being raised by the Ukrainian authorities compliance or an alternative, mutually agreeable course of action. Work
to the production licences held by independent oil and gas producers in programmes are designed to ensure that all licence obligations are met and
Ukraine, including the Group. In March 2019, a Ministry Order was issued continual interaction with Government bodies is maintained in relation to
instructing the Group to suspend all operations and production from its VAS licence obligations and commitments.
production licence, which was not resolved until March 2023. In 2020, LLC
Arkona Gas-Energy ("Arkona") faced a challenge from PJSC Ukrnafta concerning
the validity of its SC production licence, which was not ultimately resolved
in Arkona's favour until February 2021. During 2023, the Ukrainian authorities
took a number of regulatory actions against the Group, which culminated in
Ministry Orders being made in May 2023 to suspend all operations and
production on the VAS production licence and SC exploration licence area,
which suspensions were not lifted until June 2024. All such challenges
affecting the Group have been successfully defended through the Ukrainian
legal system. In September 2024, new legislation has come into force, which
requires that branches (or representative offices) of foreign companies
operating in Ukraine register their ultimate beneficial owners in Ukrainian
Registries. Regal Petroleum Corporation Ltd ("RPC"), which holds the MEX-GOL
and SV licences, operates such a branch and is therefore required to register
its ultimate beneficial owners under this law, which raises a potential risk
that such registration will not be accepted by the Ukrainian authorities, and
possibly result in regulatory action against RPC and/or its licences and
assets, including suspension of the MEX-GOL and SV licences. The business
environment is such that these types of challenges may arise at any time in
relation to the Group's operations, licence history, compliance with licence
commitments and/or local regulations. In addition, production licences in
Ukraine are issued with and/or carry ongoing compliance obligations, which if
not met, may lead to the loss of a licence.
Risks relating to key personnel
The Group's success depends upon skilled management as well as technical The Group periodically reviews the compensation and contractual terms of its
expertise and administrative staff. The loss of service of critical members staff. In addition, the Group has developed relationships with a number of
from the Group's team could have an adverse effect on the business. The technical and other professional experts and advisers, who are used to provide
current war in Ukraine has meant that, as far as possible, the Group's staff specialist services as required. As a result of the war, only essential staff
have needed to move away from areas of conflict and work remotely. are located at site, and all other staff are working remotely, either from
areas away from the conflict areas or outside Ukraine. The Group has invested
in technology that allows many staff to work just as effectively from remote
locations.
Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
(a) the unaudited condensed interim consolidated financial statements have been
prepared in accordance with UK-adopted International Accounting Standard 34,
'Interim Financial Reporting' ("IAS 34") and the AIM Rules for Companies; and
(b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an indication of important
events and their impact and a description of the principal risks and
uncertainties for the remaining six months of the financial year); and
(ii) a fair review of the information required on related party transactions.
A list of current Directors is maintained on the Group's website,
www.enwell-energy.com.
Condensed Interim Consolidated Income Statement
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
Note $000 $000
Revenue 3 23,698 33,137
Cost of sales 4 (8,152) (13,577)
Gross profit 15,546 19,560
Administrative expenses (2,365) (3,684)
Other operating gains/(losses), (net) 5 3,685 1,279
Operating profit 16,866 17,155
Net income from investments 446 -
Net impairment losses on financial assets (136) (184)
Other (losses)/gains, (net) 6 (63) 780
Finance costs (309) (359)
Profit before taxation 16,804 17,392
Income tax expense 7 (4,197) (4,918)
Profit for the period 12,607 12,474
Earnings per share (cents)
Basic and diluted 8 3.9c 3.9c
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive Income
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Profit for the period 12,607 12,474
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss:
Equity - foreign currency translation (8,901) 698
Total other comprehensive (loss)/income (8,901) 698
Total comprehensive income for the period 3,706 13,172
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 24 31 Dec 23
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 9 72,767 79,277
Intangible assets 10 7,724 8,372
Right-of-use assets 792 192
Prepayments for fixed assets 645 110
Trade and other receivables 21 -
Deferred tax asset 7 989 352
82,938 88,303
Current assets
Inventories 3,191 2,951
Trade and other receivables 11 7,304 15,585
Cash and cash equivalents 14 92,844 76,493
103 339 95,029
Total assets 186,277 183,332
Liabilities
Current liabilities
Trade and other payables (3,980) (6,012)
Lease liabilities (349) (38)
Corporation tax payable (1,665) (2,175)
(5,994) (8,225)
Net current assets 97,345 86,804
Non-current liabilities
Provision for decommissioning 12 (7,004) (7,305)
Lease liabilities (623) (245)
Defined benefit liability (342) (372)
Deferred tax liability 7 (6,416) (4,976)
Other non-current liabilities 13 (71) (88)
(14,456) (12,986)
Total liabilities (20,450) (21,211)
Net assets 165, 827 162,121
Equity
Called up share capital 28,115 28,115
Foreign exchange reserve (155,450) (146,549)
Other reserve 4,273 4,273
Retained earnings 288,889 276,282
Total equity 165,827 162,121
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in Equity
Called up share capital Share premium account Merger Capital contributions reserve Foreign exchange reserve* Retained earnings Total equity
reserve
$000 $000 $000 $000 $000 $000 $000
As at 1 January 2024 (audited) 28,115 - (3,204) 7,477 (146,549) 276,282 162,121
Profit for the period - - - - - 12,607 12,607
Other comprehensive income
- exchange differences - - - - (8,901) - (8,901)
Total comprehensive income - - - - (8,901) 12,607 3,706
Distributed dividends - - - - - - -
As at 30 June 2024 (unaudited) 28,115 - (3,204) 7,477 (155,450) 288,889 165,827
Called up share capital Share premium account Merger Capital contributions reserve Foreign exchange reserve* Retained earnings Total equity
reserve
$000 $000 $000 $000 $000 $000 $000
As at 1 January 2023 (audited) 28,115 - (3,204) 7,477 (141,705) 309,976 200,659
Profit for the period - - - - - 12,474 12,474
Other comprehensive income
- exchange differences - - - - 698 - 698
Total comprehensive income - - - - 698 12,474 13,172
Distributed dividends - - - - - (60,227) (60,227)
As at 30 June 2023 (unaudited) 28,115 - (3,204) 7,477 (141,007) 262,223 153,604
* Predominantly as a result of exchange differences on retranslation, where
the subsidiaries' functional currency is not US Dollars
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
Note $000 $000
Operating activities
Cash generated from operations 15 21,321 12,353
Charitable donations (3) (2)
Equipment rental income - 133
Income tax paid (3,458) (4,233)
Interest received 3,932 1,585
Net cash inflow from operating activities 21,792 9,836
Investing activities
Purchase of property, plant and equipment (1,384) (3,393)
Purchase of intangible assets (134) (1,338)
Proceeds from sale of property, plant and equipment 35 1
Net cash outflow from investing activities (1,483) (4,730)
Financing activities
Payment of dividends - (59,623)
Payment of principal portion of lease liabilities (203) (137)
Net cash outflow from financing activities (203) (59,760)
Net increase/(decrease) in cash and cash equivalents 20,106 (54,654)
Cash and cash equivalents at beginning of the period 14 76,493 88,652
ECL* of cash and cash equivalents 329 25
Effect of foreign exchange rate changes (4,084) (192)
Cash and cash equivalents at end of the period 14 92,844 33,831
*ECL - Expected credit losses
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
1. General Information and Operational Environment
Enwell Energy plc (the "Company") and its subsidiaries (together the "Group")
is a gas, condensate and LPG production group.
Enwell Energy plc is a public limited company incorporated in England and
Wales under the Companies Act 2006, whose shares are quoted on the AIM Market
of London Stock Exchange plc. The Company's registered office is at 84 Brook
Street, London W1K 5EH, United Kingdom and its registered number is 4462555.
As at 30 June 2024, the Company's immediate parent company was Smart Energy
(CY) Limited, which was 100% owned by Smart Holding (Cyprus) Limited, which
was 100% owned by Proteas Trustees Ltd as trustee of the STEP Trust, and
Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Maria
Sokratous as trustees of the SMART Trust. Accordingly, the Company was
ultimately controlled by Proteas Trustees Ltd as trustee of the STEP Trust,
and Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Maria
Sokratous as trustees of the SMART Trust.
The Group's gas, condensate and LPG extraction and production facilities are
located in Ukraine.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of Ukraine, and
since then there has been an ongoing war in Ukraine. Shortly after the
invasion, the Ukrainian Government imposed martial law, and the corresponding
introduction of related temporary restrictions that impact, amongst other
areas, the economic environment and business operations in Ukraine. The war
has caused significant economic challenges in Ukraine, which has led to a
deterioration of Ukrainian State finances, volatility of financial markets,
illiquidity on capital markets, higher inflation and a depreciation of the
national currency against major foreign currencies.
The war is continuing, causing very significant numbers of military and
civilian casualties and significant dislocation of the Ukrainian population.
The Russian army has occupied territories in the east and south of Ukraine,
including the majority of the Kherson, Zaporizhzhia, Luhansk and Donetsk
regions. Russian attacks have targeted and destroyed civilian infrastructure
over wide areas of Ukraine, including hospitals and residential complexes.
In June 2022, the NBU took a number of measures to protect the Ukrainian
economy, including significantly increasing its key policy interest rate to
25%, introducing temporary restrictions on foreign currency trades and
limiting cross-border payments for non-critical imports and repayment of debt
to foreign creditors, apart from international institutions. In addition, the
Ukrainian Hryvnia exchange rate with the US Dollar was effectively fixed at
UAH29.25:$1.00 in February 2022 and then at UAH36.57:$1.00 in July 2022 on the
foreign exchange market to ensure the stable operation of Ukraine's financial
system.
However, in June 2023, the NBU lifted some of the currency restrictions,
including those related to making cross-border payments to service and repay
external credit facilities and loans established after 20 June 2023 (subject
to a number of requirements) and those that were established earlier through
an international financial organisation or secured by a foreign export credit
agency or foreign state. Furthermore, with effect from 1 December 2023, the
NBU relaxed the measures that related, inter alia, to foreign currency sale
limits for banks and non-banking financial institutions and allowed export
credit agencies to make international fund transfers for insurance/reinsurance
contracts.
On 3 October 2023, the NBU returned to a floating exchange rate for the
Ukrainian Hryvnia, and as of 31 December 2023, the Ukrainian Hryvnia exchange
rate with the US Dollar was UAH37.98/$1.00 (UAH36.57/$1.00 as at 31 December
2022).
In addition, during 2023 and 2024, the NBU gradually decreased its key policy
rate, and this has stood at 13% since 14 June 2024. The NBU is now following
an interest rate policy consistent with inflation targets. The inflation rate
in Ukraine for 2023 was 5% (2022: 26.6%) according to the statistics published
by the State Statistics Service of Ukraine.
During 2023, Ukrainian GDP increased by 5.3% compared with a 29.1% decrease in
2022.
The Ukrainian Government also took a number of actions designed to limit the
negative effects of the war on the Ukrainian economic environment during the
period of martial law, but several of these actions were relaxed with effect
from 1 August 2023, including the moratorium on tax audits.
Since the start of the war, the Ukrainian budget has experienced a significant
deficit, which has been financed by national and international borrowings,
grants, and other means. As a result of the inflow of international aid,
Ukrainian currency reserves have reached a record level of $41.7 billion as of
31 July 2023. This was the highest level of such reserves in more than 30
years. However, following a slowdown of international aid, such reserves
decreased to $40.5 billion as of 31 December 2023. International support is
crucially important to Ukraine's ability to continue fighting against Russia's
aggression and to fund its budget deficit and ongoing debt repayments.
The nature of the situation in Ukraine and the unpredictability of the outcome
means it is impracticable to assess the full impact of the war on the economic
environment.
Overall, the final resolution and the ongoing effects of the war and political
and economic situation in Ukraine are difficult to predict, but they may have
further severe effects on the Ukrainian economy and the Group's business.
As at 23 September 2024, the official NBU exchange rate of the Ukrainian
Hryvnia against the US Dollar was UAH41.4/$1.00, compared with UAH40.54/$1.00
as at 30 June 2024.
Further details of risks relating to Ukraine can be found within the Principal
Risks and Uncertainties section earlier in this announcement.
2. Accounting Judgements and Estimates
Basis of preparation
These unaudited condensed interim consolidated financial statements for the
six month period ended 30 June 2024 have been prepared in accordance with
UK-adopted International Accounting Standard 34, 'Interim Financial Reporting'
("IAS 34") and the AIM Rules for Companies. The accounting policies adopted
are consistent with those of the previous financial year and corresponding
interim reporting period.
These unaudited condensed interim consolidated financial statements do not
comprise statutory accounts within the meaning of section 434 of the Companies
Act 2006. Statutory accounts for the year ended 31 December 2023 were
approved by the Board of Directors on 20 June 2024 and subsequently filed with
the Registrar of Companies. The Auditors' Report on those accounts was not
qualified and did not contain any statement under section 498 of the Companies
Act 2006.
The unaudited condensed interim consolidated financial statements should be
read in conjunction with the annual consolidated financial statements for the
year ended 31 December 2023, which were prepared in accordance with UK-adopted
International Accounting Standards.
The accounting policies and methods of computation and presentation used are
consistent with those used in the Group's Annual Report and Financial
Statements for the year ended 31 December 2023, with the exception of the new
or revised standards and interpretations set out below.
Going Concern
The Group's business activities, together with the factors likely to affect
its future operations, performance and position are set out in the Chairman's
Statement, Chief Executive's Statement and Finance Review. The financial
position of the Group, its cash flows and liquidity position are set out in
these unaudited condensed interim consolidated financial statements.
On 24 February 2022, Russia commenced a military invasion of Ukraine, and
since then there has been an ongoing war between Russia and Ukraine.
Immediately after the commencement of the war, the Ukrainian Government
imposed martial law and introduced a number of related temporary restrictions
that impacted the economic environment and business operations in Ukraine.
While a number of restrictions remain in place, improvements in the economic
environment have led the Ukrainian Government to relax a number of the
restrictions and stabilise the economic situation in Ukraine.
The production assets of the Group are located in the central and eastern part
of the country (Poltava and Kharkiv regions) which are controlled by the
Ukrainian Government. As of the date of approval of these financial
statements, no assets of the Group have been damaged, and the Group continues
to operate and produce from its MEX-GOL and SV assets in the Poltava region
and VAS asset in the Kharkiv region. However, as a result of regulatory action
by the State Geologic and Subsoil Survey of Ukraine, the licences relating to
the Group's SC asset in the Poltava region and VAS asset in the Kharkiv region
were suspended for the period between 4 May 2023 and 26 June 2024, and
consequently the Group ceased all field and production operations on these
licences during that period. No military activities have occurred at the
Group's field locations. The Gas Transmission System Operator of Ukraine has
maintained complete operational and technological control over the operations
of the Ukrainian Gas Transmission System. However, as of the date of approval
of these financial statements, the war has had, and continues to have, a
material impact on the production and sales levels of the business and
execution of the Group's 2024 budget.
The Group has no debt and funds its operations from its own cash resources.
Cash and cash equivalents were $97.1 million as at 23 September 2024. The
Directors maintain a significant level of flexibility to modify the Group's
development plans as may be required to preserve cash resources for liquidity
management. Absent the potential impact of the war in Ukraine, the Directors
are satisfied that the Group and the Company are a going concern and will
continue their operations for the foreseeable future.
In assessing the impact of the war on the ability of the Group and the Company
to continue as a going concern, the Directors have analysed a number of
possible scenarios of economic and military developments and the impact on the
expected cash flows of the Group and Company for 2024 and 2025. This includes
considering a possible (but in the view of the Directors, highly unlikely)
worst case scenario in which the Group has zero production as a result of
possible future military conflict dictating field operations being completely
shut-in, and all other non-production related costs being maintained at
current levels with no reduction or mitigating actions as would otherwise be
possible. Even in this worst-case scenario, the Directors are satisfied that
the Group and the Company have sufficient liquid resources to be able to meet
their liabilities as they fall due and to be able to continue as a going
concern for the foreseeable future.
The corporate strategy for the near term is to:
• continue production from the MEX-GOL, SV and VAS licences, generating cash to
cover Group costs and add to existing cash resources, whilst moderating
development plans to reduce cash spend exposure whilst the war and
operational/political uncertainty continue; and
• tightly manage costs to ensure cash resources are maintained at levels capable
of sustaining the business through the uncertainty that lies ahead.
In respect of the Group's operations, staff and assets in Ukraine, the
potential short and long-term impact of the future development of the war is
inherently uncertain. Accordingly, this creates a material uncertainty related
to events or conditions that may cast significant doubt on the Group's ability
to continue as a going concern because of the potential impact on its ability
to continue its operations for the foreseeable future and realise its assets
in the normal course of business. The financial statements do not include the
adjustments that would result if the Group were unable to continue as a going
concern.
The Company is a UK-based investment holding company. The Company had cash and
cash equivalents of $17.2 million as at 23 September 2024, all of which are
held outside of Ukraine, in US Dollars, Pounds Sterling and Euros. The
Directors are satisfied that the Company is a going concern and will be able
to continue its operations for the foreseeable future, and there is no
material uncertainty in respect of its ability to do so.
New and amended standards adopted by the Group
The following amended standards became effective from 1 January 2023, but did
not have a material impact on the Group's consolidated or Company's financial
statements:
• IFRS 17 "Insurance Contracts". IFRS 17 replaces IFRS 4, which has given
companies dispensation to carry on accounting for insurance contracts using
existing practices. As a consequence, it was difficult for investors to
compare and contrast the financial performance of otherwise similar insurance
companies.
• Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and
effective for annual periods beginning on or after 1 January 2023). The
amendments include a number of clarifications intended to ease implementation
of IFRS 17, simplify some requirements of the standard and transition.
• Transition option to insurers applying IFRS 17 - Amendments to IFRS 17 (issued
on 9 December 2021 and effective for annual periods beginning on or after 1
January 2023). The amendment to the transition requirements in IFRS 17
provides insurers with an option aimed at improving the usefulness of
information to investors on initial application of IFRS 17.
• Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting
policies (issued on 12 February 2021 and effective for annual periods
beginning on or after 1 January 2023). IAS 1 was amended to require companies
to disclose their material accounting policy information rather than their
significant accounting policies.
• Amendments to IAS 8: Definition of Accounting Estimates (issued on 12 February
2021 and effective for annual periods beginning on or after 1 January 2023).
The amendment to IAS 8 clarified how companies should distinguish changes in
accounting policies from changes in accounting estimates.
• Deferred tax related to assets and liabilities arising from a single
transaction - Amendments to IAS 12 (issued on 7 May 2021 and effective for
annual periods beginning on or after 1 January 2023). The amendments to IAS
12 specify how to account for deferred tax on transactions such as leases and
decommissioning obligations.
• Amendments to IAS 12 Income taxes: International Tax Reform - Pillar Two Model
Rules (issued 23 May 2023). In May 2023, the IASB issued narrow-scope
amendments to IAS 12, 'Income Taxes'. This amendment was introduced in
response to the imminent implementation of the Pillar Two model rules released
by the Organisation for Economic Co-operation and Development's (OECD) as a
result of international tax reform.
There are no other amended standards which the Group considers to have a
material impact on these financial statements.
Significant accounting judgements and estimates
The preparation of the unaudited condensed interim consolidated financial
statements requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and the reported amounts of
assets and liabilities, income and expenses. Actual results may differ from
these estimates.
In preparing these unaudited condensed interim consolidated financial
statements, the significant judgements made by management in applying the
Group's accounting policies and the key sources of estimation uncertainty were
consistent with those that applied to the consolidated financial statements
for the year ended 31 December 2023 with certain updates described below.
Estimates
Depreciation of Development and Production Assets
Development and production assets held in property, plant and equipment are
depreciated on a unit of production basis at a rate calculated by reference to
proven and probable reserves at the end of the period plus the production in
the period, and incorporating the estimated future cost of developing and
extracting those reserves. Future development costs are estimated using
assumptions about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating costs, together
with assumptions on oil and gas realisations, and are revised annually. The
reserves estimates used are determined using estimates of gas in place,
recovery factors, future hydrocarbon prices and also take into consideration
the Group's latest development plan for the associated development and
production asset. The latest development plan and therefore the inputs used to
determine the depreciation charge for the MEX-GOL, SV and VAS fields continue
until the end of the economic life of the fields, which is assessed to be
2038, 2042 and 2028 respectively, based on the assessment contained in the
DeGolyer & MacNaughton reserves report for these fields. The licences for
the MEX-GOL and SV fields have recently been extended until 2044. Were the
estimated reserves at the beginning of the year to differ by 10% from previous
assumptions, the impact on depreciation for the period ended 30 June 2024
would be to increase it by $265,500 or decrease it by $217,066 (31 December
2023: increase by $1,066,000 or decrease by $479,000).
3. Segmental Information
In line with the Group's internal reporting framework and management
structure, the key strategic and operating decisions are made by the Board of
Directors, who review internal monthly management reports, budgets and
forecast information as part of this process. Accordingly, the Board of
Directors is deemed to be the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas exploration,
development and production. The Group's operations are located in Ukraine,
with its head office in the United Kingdom. These geographical regions are the
basis on which the Group reports its segment information. The segment results
as presented represent operating profit before depreciation and amortisation.
6 months ended 30 June 2024 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 13,679 - 13,679
Condensate sales 6,238 - 6,238
Liquefied Petroleum Gas sales 3,781 - 3,781
Total revenue 23,698 - 23,698
Segment result 20,455 (758) 19,697
Depreciation and amortisation of non-current assets (2,831) - (2,831)
Operating profit 17,624 (758) 16,866
Segment assets 166,291 19,986 186,277
Capital additions* 983 - 983
*Comprises additions to property, plant and equipment and intangible assets
(Notes 9 and 10).
Year ended 31 December 2023 (audited)
Ukraine United Kingdom Total
2023 2023 2023
$000 $000 $000
Revenue
Gas sales 42,270 - 42,270
Condensate sales 10,466 - 10,466
Liquefied Petroleum Gas sales 9,458 - 9,458
Total revenue 62,194 - 62,194
Segment result 43,649 (1,409) 42,240
Depreciation and amortisation of non-current assets (6,704) - (6,704)
Operating profit 35,536
Segment assets 161,232 22,100 183,332
Capital additions* 15,749 - 15,749
*Comprises additions to property, plant and equipment and intangible assets
(Notes 9 and 10).
6 months ended 30 June 2023 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 24,568 - 24,568
Condensate sales 3,736 - 3,736
Liquefied Petroleum Gas sales 4,833 - 4,833
Total revenue 33,137 - 33,137
Segment result 20,781 (146) 20,635
Depreciation and amortisation of non-current assets (3,480) - (3,480)
Operating profit 17,301 (146) 17 155
Segment assets 170,674 22,222 192,896
Capital additions* 10,171 - 10,171
*Comprises additions to property, plant and equipment and intangible assets
(Notes 9 and 10).
There are no inter-segment sales within the Group and all products are sold in
the geographical region in which they are produced. The Group is not
significantly impacted by seasonality.
4. Cost of Sales
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Depreciation of property, plant and equipment 2,413 3,163
Production taxes 2,319 5,772
Staff costs 913 1,255
Cost of inventories recognised as an expense 812 837
Rent expenses 809 1,470
Transmission tariff for Ukrainian gas system 138 174
Amortisation of mineral reserves 168 180
Other expenses 580 726
8,152 13,577
5. Other operating gains/(losses), (net)
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Interest income on cash and cash equivalents 3,932 1,585
Reversal of accruals 94 331
Other operating (losses)/gains, net (341) (638)
3,685 1,279
6. Other (losses)/gains, (net)
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Net foreign exchange gains/(losses) (58) 712
Charitable donations (3) (2)
Other (losses)/gains, (net) (2) 70
(63) 780
7. Taxation
The income tax charge of $4,197,000 for the six month period ended 30 June
2024 relates to a сurrent tax charge of $3,060,000 and a deferred tax charge
of $1,137,000 (1H 2023: current tax charge of $3,049,000 and deferred tax
charge of $1,869,000).
The movement in the period was as follows:
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Deferred tax (liability)/asset recognised relating to development and
production assets at MEX-GOL-SV fields and provision for decommissioning
At beginning of the period (4,976) (3,232)
Charged to Income Statement - current period (1,821) (2,381)
Effect of exchange difference 381 -
At end of the period (6,416) (5,613)
Deferred tax asset/(liability) recognised relating to development and
production assets at VAS field and provision for decommissioning
At beginning of the period 352 287
Credited to Income Statement - current period 685 512
Effect of exchange difference (48) -
At end of the period 989 799
Taxes on income in the interim periods are accrued using the tax rate that
would be applicable to the expected total annual profit or loss. The effective
tax rate for the six month period ended 30 June 2024 was 25% (1H 2023: 25%).
The deferred tax asset relating to the Group's provision for decommissioning
at 30 June 2024 of $586,000 (31 December 2023: $555,000) was recognised on
the tax effect of the temporary differences of the Group's provision for
decommissioning at the MEX-GOL and SV fields, and its tax base. The deferred
tax liability relating to the Group's development and production assets at the
MEX-GOL and SV fields at 30 June 2024 of $7,001,000 (31 December 2023:
$5,531,000) was recognised on the tax effect of the temporary differences
between the carrying value of the Group's development and production asset at
the MEX-GOL and SV fields, and its tax base.
The deferred tax asset relating to the Group's provision for decommissioning
at 30 June 2024 of $255,000 (31 December 2023: $280,000) was recognised on
the tax effect of the temporary differences on the Group's provision on
decommissioning at the VAS field, and its tax base. The deferred tax asset
relating to the Group's development and production assets at the VAS field at
30 June 2024 of $734,000 (31 December 2023: deferred tax liability of
$72,000) was recognised on the tax effect of the temporary differences between
the carrying value of the Group's development and production asset at the VAS
field, and its tax base.
8. Earnings per Share
The calculation of basic earnings per ordinary share has been based on the
profit for the six-month period ended 30 June 2024 and 320,637,836 (30 June
2023: 320,637,836) ordinary shares, being the weighted average number of
shares in issue for the period. There are no dilutive instruments.
9. Property, Plant and Equipment
6 months ended 30 Jun 24 6 months ended 30 Jun 23
(unaudited) (unaudited)
Oil and gas development and production assets Oil and gas exploration and evaluation assets Other Total Oil and gas development and production assets Oil and gas exploration and evaluation assets Other Total
Ukraine fixed Ukraine fixed
assets assets
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of the period 141,902 13,944 2,181 158,027 135,255 13,093 1,968 150,316
Additions 488 196 164 848 8,905 1,125 124 10,154
Disposals (49) - (166) (215) (204) - (28) (232)
Exchange differences (8,766) (888) (136) (9,790) - - - -
At end of the period 133,575 13,252 2,043 148,870 143,956 14,218 2,064 160,238
Accumulated depreciation and impairment
At beginning of the period 75,619 1,635 1,496 78,750 73,108 1,677 1,275 76,060
Charge for the period 2,392 - 104 2,496 3,047 - 135 3,182
Disposals (44) - (43) (87) (86) - (10) (96)
Exchange differences (4,855) (103) (98) (5,056) - - - -
At end of the period 73,112 1,532 1,459 76,103 76,069 - 1,400 79,146
Net book value at the beginning of the period 66,283 12,309 685 79,277 62,147 11,416 693 74,256
Net book value at end of the period 60,463 11,720 584 72,767 67,887 12,541 664 81,092
At 30 June 2024, an impairment indicator was identified by the Group, and
impairment tests were performed for the MEX-GOL, SV, SC and VAS fields. These
reviews concluded that no impairment to carrying value had occurred on any
Group asset.
10. Intangible Assets
6 months ended 30 Jun 24 6 months ended 30 Jun 23
(unaudited) (unaudited)
Mineral reserve rights Exploration and evaluation intangible assets Other intangible assets Total Mineral reserve rights Exploration and evaluation intangible assets Other intangible assets Total
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of the period 4,891 6,190 914 11,995 5,080 6,433 860 12,373
Additions - - 134 134 - - 17 17
Disposals - - (45) (45) - - (23) (23)
Exchange differences (308) (395) (57) (760) - - - -
At end of the period 4,583 5,795 946 11,324 5,080 6,433 854 12,367
Accumulated amortisation
and impairment
At beginning of the period 3,162 - 461 3,623 2,925 - 454 3,379
Amortisation charge for the period 162 - 86 248 180 - 59 239
Disposals - - (35) (35) - - (22) (22)
Exchange differences (200) - (36) (236) - - - -
At end of the period 3,124 - 476 3,600 3,105 - 491 3,596
Net book value at beginning of the period 1,729 6,190 453 8,372 2,155 6,433 406 8,994
Net book value at end of the period 1,459 5,795 470 7,724 1,975 6,433 363 8,771
Intangible assets consist mainly of the hydrocarbon production licence
relating to the VAS gas and condensate field, which is held by LLC Prom-Enerho
Produkt, and the SC hydrocarbon exploration licence, which is held by LLC
Arkona Gas-Energy. The Group amortises the hydrocarbon production licence
relating to the VAS field using the straight-line method over the term of the
economic life of the VAS field until 2028. The SC hydrocarbon exploration
licence is not amortised due to it being at an exploration and evaluation
stage.
As at 30 June 2024, an impairment indicator was identified by the Group, and
impairment tests were performed for the MEX-GOL, SV, SC and VAS fields. These
reviews concluded that no impairment to carrying value had occurred on any
Group asset.
11. Trade and Other Receivables
30 Jun 24 31 Dec 23
(unaudited) (audited)
$000 $000
Trade receivables 2,734 11,580
Other financial receivables 609 533
Less credit loss allowance (131) (323)
Total financial receivables 3,212 11,790
Prepayments and accrued income 239 350
Other receivables 3,853 3,445
Total trade and other receivables 7,304 15,585
Due to the short-term nature of the current trade and other financial
receivables, their carrying amount is assumed to be the same as their fair
value. All trade and other financial receivables, except those provided for,
are considered to be of high credit quality.
As at 30 June 2024 and 31 December 2023, the Group's total trade receivables
were denominated in Ukrainian Hryvnia.
12. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (audited)
$000 $000
At beginning of the period 7,305 6,964
Unwinding of discount 166 166
Effect of exchange difference (467) -
At end of the period 7,004 7,130
The provision for decommissioning is based on the net present value of the
Group's estimated liability for the removal of the Ukrainian production
facilities and well site restoration at the end of production life.
The non-current provision of $7,004,000 (30 June 2023: $7,130,000) represents
a provision for the decommissioning of the Group's MEX-GOL, SV, VAS and SC
production and exploration facilities, including site restoration. None of the
provision was utilised during the reporting period.
13. Other non-current liabilities
Other non-current liabilities as at 30 June 2024 and 31 December 2023 consist
of the long-term obligations for the Ukrainian State special purpose fund
measured at amortised cost using an interest rate of 20%.
14. Financial Instruments
The Group's financial instruments comprise cash and cash equivalents and
various items such as debtors and creditors that arise directly from its
operations. The Group has bank accounts denominated in British Pounds, US
Dollars, Euros and Ukrainian Hryvnia. The Group does not have any borrowings.
The main future risks arising from the Group's financial instruments are
currency risk, interest rate risk, liquidity risk and credit risk.
The Group's financial assets and financial liabilities, measured at amortised
cost, which approximates their fair value, comprise the following:
30 Jun 24 31 Dec 23
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 92,844 76,493
Trade and other receivables 2,734 11,790
95,578 88,283
Financial liabilities
Lease liabilities 972 283
Trade and other payables 783 1,293
Other financial liabilities 780 1,248
2,535 2,824
At 30 June 2024, the Group held cash and cash equivalents in the following
currencies:
30 Jun 24 (unaudited) 31 Dec 23
(audited)
$000 $000
Ukrainian Hryvnia 74,470 55,787
US Dollars 18,015 20,341
Euros 256 249
British Pounds 103 116
92,844 76,493
All of the cash and cash equivalents held in Ukrainian Hryvnia are held in
banks within Ukraine, and all other cash and cash equivalents are held in
banks within Europe, Ukraine, the US and the United Kingdom.
15. Reconciliation of Operating Profit to Operating Cash Flow
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Operating profit 16,866 17,155
Depreciation and amortisation 3,087 3,589
Less interest income recorded within operating profit (3,932) (1,585)
Fines and penalties paid/(received) 41 (1)
Net (gain)/loss on sale of non-current assets (35) (3)
(Increase)/decrease in provisions (329) 25
(Decrease)/increase in inventory (442) 709
Decrease/(increase) in receivables 7,811 (3,583)
(Decrease) in payables (1,746) (3,953)
Cash generated from operations 21,321 12,353
16. Contingencies and Commitments
Amounts related to works contracted in relation to the Group's 2024 investment
programme at the MEX-GOL, SV, VAS and SC gas and condensate fields in Ukraine,
but not provided for in the unaudited condensed interim consolidated financial
statements at 30 June 2024, were $111,000 related to Oil and Gas Exploration
and Evaluation assets and $2,364,000 related to Oil and Gas Development and
Production assets (31 December 2023: $118,000 and $597,000 respectively).
Since 2010, the Group has been in dispute with the Ukrainian tax authorities
in respect of VAT receivables on imported leased equipment, with a disputed
liability of up to UAH 8,487,000 ($302,000) inclusive of penalties and other
associated costs. There is a level of ambiguity in the interpretation of the
relevant tax legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in three court
cases in respect of this dispute in courts of different levels. On 20
September 2016, a hearing was held in the Supreme Court of Ukraine of an
appeal of the Ukrainian tax authorities against the decision of the Higher
Administrative Court of Ukraine, in which the appeal of the Ukrainian tax
authorities was upheld. As a result of this appeal decision, all decisions of
the lower courts were cancelled, and the case was remitted to the first
instance court for a new trial. On 1 December 2016 and 7 March 2017
respectively, the Group received positive decisions in the first and second
instance courts, but no appointment of hearings has been settled yet. No
liability has been recognised in these unaudited condensed interim
consolidated financial statements for the period ended 30 June 2024 (30 June
2023: nil), as the Group has been successful in previous court cases in
respect of this dispute in courts of different levels, the date of the next
legal proceedings has not been set and as management believes that adequate
defences exist to the claim.
17. Related Party Disclosures
Key management personnel of the Group are considered to comprise only the
Directors. Remuneration of the Directors for the six month period ended 30
June 2024 was $934,311 (1H 2023: $407,000, and year ended 31 December 2023:
$815,000).
During the period, Group companies entered into the following transactions
with related parties which are not members of the Group:
6 months ended 6 months ended
30 Jun 24 30 Jun 23
(unaudited) (unaudited)
$000 $000
Sale of goods/services - 19,410
Purchase of goods/services 360 348
Amounts owed by related parties 11 55,719
Amounts owed to related parties 70 185
All related party transactions were with subsidiaries of the ultimate Parent
Company, and primarily relate to the sale of gas to LLC Smart Energy (which
has now ceased), the rental of office facilities and vehicles and the sale of
equipment. The amounts outstanding were unsecured and have been or will be
settled in cash.
At the date of this announcement, none of the Company's controlling parties
prepares consolidated financial statements available for public use.
18. Events occurring after the Reporting Period
The ongoing war in Ukraine means that the fiscal, economic and humanitarian
situation in Ukraine is unstable and extremely challenging and the final
resolution and consequences of the ongoing war are hard to predict, but they
may have a further serious impact on the Ukrainian economy and business of the
Group. Management continues to identify and mitigate, where possible, the
impact on the Group, but the majority of these factors are beyond their
control, including the duration and severity of the war, as well as the
further actions of various governments and diplomacy.
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